Ethiopia is to launch mega sized industrial parks in close to five locations for investment of 30 billion Br, on around 20 million square meters of land to be covered with factories, and service facilities. Hoping to boost its industrial capability particularly the share of manufacturing to the GDP to over 20pc, the government is set to attain structural transformation in the economy. Arkebe Oqubay (PhD), a brain behind this drive, discussed details of the coming into life of industrial parks with Fortune's MANAGING EDITOR, Tamrat G. Giorgis.
Ethiopia is to launch mega sized industrial parks in close to five locations for investment of 30 billion Br, on around 20 million square meters of land to be covered with factories, and service facilities. Hoping to boost its industrial capability particularly the share of manufacturing to the GDP to over 20pc, the government is set to attain structural transformation in the economy. Arkebe Oqubay (PhD), a brain behind this drive, discussed details of the coming into life of industrial parks with Fortune’s MANAGING EDITOR, Tamrat G. Giorgis.
Fortune: What place does the introduction and expansion of industrial parks have in the overall growth strategy under the Growth & Transformation Plan (GTP-II)?
Arkebe Oqubay (PhD): I would like to discuss this from the perspective of our vision for 2025. Up until now, Ethiopia has focused on agricultural development led industrialisation (ADLI), adopted in 1994. The assumption then, was that it would pursue this strategy for about 15 to 20 years. If we succeed and the growth is much faster, we can then jump into a new strategy. It is now almost 20 years since ADLI was approved. Agriculture is the sector on which the majority of Ethiopia’s population relies and the GDP depends; it has played a decisive role for the economic take off.
But agriculture never lasts in leading the economy in any country. It has to gradually evolve particularly because manufacturing has a strong spillover effect in technological advancement, in economies of scale and in being competitive globally. The 10-year perspective is thus a transition where manufacturing will lead the economy.
With this in mind, we have formed our vision that Ethiopia will be the manufacturing power-house of Africa; we will sustain rapid economic growth, and GDP will grow by an annual 11pc, while manufacturing has to grow by 25pc for a structural change to happen. Structural change is a shift from low to higher productivity activities; and in terms of employment from agriculture to manufacturing as well as the bigger share of the GDP from agriculture to manufacturing. In concrete terms, we have also put aims to create two million manufacturing jobs in 10 years, with the medium and large enterprises.
What does this entail in practical terms?
On average, the manufacturing sector should contribute by generating 200,000 jobs annually, increasing by 50pc every year from the 350,000 jobs manufacturing has created ever since. We have also aimed at the share of manufacturing in the economy to grow four-fold, from the existing five per cent to 20pc. In exports, its share has to grow from 10pc to 40pc. To achieve this, we have to first focus on what we have, ensuring existing factories produce and operate at full capacity, and provide support to see increased capacity and improved productivity.
But this will not take us far; for we cannot bring this by solely depending on the capacity of existing factories. Thus, one of the key strategies is to bring new investments, both domestic and foreign. But, we are going to single-mindedly focus on manufacturing. Within manufacturing, we have identified 10 key sectors; and, in each sector, we have put a strategy that we have to focus on countries of origin such as India, China and Turkey for textiles as we would focus on the Dutch for floriculture. We will also aim at targeted companies we otherwise call “anchors or queen bees.”
This we do to answer a simple question. Why do many of the foreign investors in Ethiopia fail? It is because the environment is difficult and they face additional problems which they do not have in their home countries. The other most important issue here is that we want domestic industrialists to grow and learn from the best. It is just like athletics. If you want to be the best athlete, you do not want to learn from Arkebe; you learn it from Haile Gebresellasie. We want to see the domestic companies learn from their international peers because they bring in better management capacity, technology and marketing networks.
But where does the emergence of industrial parks fit in all this?
We now want to see thousands of companies go into operation in a very short time, following our strategy of industrial parks development. But we have noted that industrialisation and pollution are inseparable. We are planning to implement a new approach that industrialisation’s impact on climate would be mitigated as much as possible. We are not just aiming to be the leading hub, but we also want to be carbon neutral, preventing pollution with fast industrialisation. Having all this in mind, we need to develop industrial parks, keep them in clusters and away from farm lands, and develop waste treatment systems.
If we want the companies to start business as fast as possible, the set up time should be short. Our capacity to provide utilities and infrastructure is quite limited and it is very expensive. We have to concentrate on how to minimise the efforts in limited clusters; instead of distributing electricity all over the place, it is wise to do so in one place. There are also major gains as well, such as the potential to transform the parks as learning centres to transfer technology from one factory to another. Foreign direct investment (FDI) is the other major issue behind industrial parks, whether in the United States or any other country. Industrial parks are key vehicles to receive FDI and encourage exports.
Q: There is little debate about the importance of soliciting capital, skill and technology from wherever it is available. The question remains what place does FDI have in manufacturing and in industry generally? How much space should it claim within the overall national policy making?
This is related to the size of the cake. If you make it small, the share of FDI will be limited. If you make the pie much bigger with whatever local mobilisation you have, you will still be able to attract more FDI. What we should be concerned with – and this is the experience of East Asians – is not about whether the firm is local or foreign, but if the investment is in productive sectors, in particular in manufacturing. The focus of our FDI attraction will be on the key priority sectors we have identified such as in textiles, leather, pharmaceuticals. The manner in which we discriminate investment is not along the lines of local and foreign, but whether it is put in productive or non-productive sectors. Whoever invests in manufacturing, they should deserve higher attention.
Q: Is that regardless of the ownership of the assets?
Yes; I would give priority to Huajian [Chinese footwear manufacturer] rather than to a person who is investing in casinos.
Q: How do you reconcile this with the ideological convictions of the ruling party, which has promoted agricultural transformation to lift up subsistence farmers to an income level of disposability for consumption; support micro and medium enterprises; and encourage the indigenous private sector to own the productive assets of the country? The ruling party’s documents specifically say that FDI can only be supplementary, not claim a decisive role.
There is no contradiction. In our party documents, it is clearly put that FDI is essential.
Q: But complementary?
“Essential” is the word. There is no country, perhaps North Korea, which survives without FDI. It is impossible! If a country needs to catch up, it has to learn from other countries and need to use multiple instruments. Trade is one, for instance. Local industrialists do not just invent products, they learn from imported goods. Countries also receive foreign loans, technology, capacity and capital.
When you use FDI, you have to use it for long-term purposes and to strengthen the domestic industrialists as has been seen in South Korea. The leading companies there, such as Hyundai and Samsung, started out 50 or 60 years ago as contractors and trading houses.
In our case, for instance, we might put 10,000 individuals to be factory owners. But then the key issue arises: do we have the money for all that? In the event we make the money available, do they have the required management skills? Do they have the capacity for knowledge transfer?
So, there is no dichotomy.
Q: Would you say that there is a wider consensus within the ruling party over this and that everybody is on the same page?
I cannot say 100pc; but, the majority is on the same page.
Q: Can you say this is a governing view within the ruling party?
I would say so! It is included in all our documents that we need knowledge, and foreign capital, without its interface no country can grow. One way of looking at this issue is to see what Meles had done. He had worked hard and spent time with the leading companies who are already here, talking to the investors at a personal level. Meles had met Castelli [a French investor in brewery and winery] many times;and encouraging them to invest. It was Meles who convinced AKEA to come. Rather than only focusing on the rhetoric, we also have to look at the actual practice we have been engaging in. By the same token, Prime Minister Hailemariam is making a lot of effort to attract investment, because that is the way this country can move forward.
Q: Speaking of the industrial parks, what size are we talking about? I know that the first one started in Addis Abeba – the Bole Lemi industrial park, then followed by Dukem, which is a private investment. Now there is one being established in Hawassa, to be followed by another in Dire Dawa. Considering the full picture, what should we expect in five years?
We will be expecting a miracle, I would say. Under GTP I, we had plans to build industrial parks in Kombolcha, Adama, Dire Dawa, Hawassa and Addis Abeba. Five years passed, and we did not build a single industrial park in the four cities. The industrial park in Addis Abeba took us five years and it is yet to be completed.
Why did we fail? It is simply because we did not understand the internal mechanism to develop industrial parks, as we did not have the full comprehensive view of how industrial parks are built. How we managed, for instance, the development of Bole Lemi Industrial Park was not the best way; it took us five years and we created only 3,000 jobs.
Developing industrial parks is a critical component of the 10-year strategy; it is not a policy that we do partly. The first thing we needed to understand was what industrial parks really mean; that they are not about building roads and shops. It is about building institutions; industrial parks are institutions.
We spent one year studying the experiences of other countries, but focusing on East Asian countries such as South Korea, China, Singapore, and Vietnam. Industrial parks were developed primarily after the 1960s, and they were an important ingredient for the East Asian miracle. We also studied the case of Africa such as Mauritius and Nigeria; Nigeria in particular because it was not a successful story. We wanted to understand the reasons for their failure.
Subsequently, a white policy paper was prepared and tabled for discussion in the presence of all policy makers who were directly involved in this process. We had had a full-day session. I believe it was enlightening for many of them. Of course, you cannot expect every individual to agree.
Q: But there remain sharp differences from that meeting among the core of the leadership.
There were sharp differences with few individuals. There can never be a policy that is agreed on 100pc; the issue is not about individuals. What you need is a substantial consensus and more than 90pc have agreed on the white policy paper.
This consensus was followed by important steps. First, development of industrial parks required a legal framework; it was prepared and discussed at the Ethiopian Investment Board, chaired by the Prime Minister, before it was presented to the Council of Ministers. In March last year, the proclamation on industrial parks was approved in Parliament. I consider this a major milestone, for it cannot happen without a consensus. We have also undertaken some institutional changes, such as the restructuring of the Ethiopian Investment Commission, a higher statute from an agency and to be directly accountable to the Prime Minister’s Office, as well as the investment board chaired by the Prime Minister. Again, this is a major departure because we know that the past five years we did not succeed in fulfilling our aims.
We have also created a new corporation, the Industrial Parks Development Corporation (IPDC), following essentially the Singaporean model. IPDC is structured first as a corporation, to be creditworthy to have access to capital markets, and given two major mandates. IPDC has become the lead agency to build industrial parks financed by the government; and it is to encourage private developers to simplify the process of building industrial parks either on their own or through joint ventures.
The IPDC will have a land bank for industrial parks development transferred from the regional states, which will prepare the lands, clear them of settlers, pay compensations and make them ready in the selected cities.
Q: Despite all these, issues remain. As opposed to light and satellite industrial set ups scattered all over the place, industrial parks can only be concentrated in a few places. How do you avoid the imbalance in regional growth as the case is in China?
We have to understand that industry does not grow everywhere; industrial activities are clustered in every country. It is not like agricultural products, and this is what economic history shows. There is no single country where factories mushroom in the rural areas. The reason is simple. Because factories use technologies, they use a production system well-connected within itself. It is not like one farm-hold here and another there. Factories like to locate close to each other. It is just like Merkato, where all the shops are clustered in one place so that anyone looking for or sell goods would just go to there. What they did in China is not necessarily wrong. The most basic prospect for industrial development, to attract FDI, and export goods with developed infrastructure was in the coastal areas. For a decade, they invested in it, before they extended it to the central China and later on to the western parts. If they had started all over the place, perhaps the dynamism that has happened might not have happened.
In our case, we will develop 20 million square metres of factory buildings in the coming 10 years. We are going to need land equal to 100,000 hectares. Every year, we are going to need 10,000 hectares of land and we have to build two million square metres, either by government financing or private developers.
The main area that is to develop is on the periphery of Addis Abeba, up to the corridor of Adama. We also have major cities such as Dire Dawa, Hawassa, Meqelle and Adama designated for the industrial parks, while we have started with a model in Hawassa. We are developing this park for leading companies in apparel and textile; and, we have been negotiating with 10 leading companies in the US, Sri Lanka, India, Indonesia, and China.
Q: I will come to the construction of the parks. You have not addressed the issue that there will eventually be growth imbalance between regions.
From our perspective, we have planned to cover all the regions. When we look at regions, we should not look at the demarcation among regional states. We have to think in terms of economic regions because if there is a park on a border, you can serve both regions. This is also a lesson we have learnt from Asia, where for instance in Vietnam they have 64 provinces and they are fragmented with no synergies. The parks there are too small.
We needed to start with a model because in development the demonstration effect is so important people believe in the institution. During the first wave, Hawassa will serve as a hub for the southern part of the country, to be followed by one in Dire Dawa, which is becoming a hub of the eastern part. Adama will be a hub of the central part, as Kombolcha and Meqelle are for the northern-eastern parts. The second wave will see the development of industrial parks in Jimma, Bahir Dar, Jigjiga and Semera. Many of these are where there is railway services available so that logistics and transportation costs are reduced and with possibilities that are closer to the port.
We are going to bridge all of them in three or four years; what has happened in China will not happen here because of the way we have designed them; there are hubs for every region.
Q: You are going to get companies which you hope will help create two millions jobs in the next 10 years. These companies will have some kind of leverage during time of disagreement. When economies are going through hardship, these companies will pack and leave as opposed to the indigenous private sector which will shoulder the difficult times. Your sovereignty in policy making will fall under their mercy should you fail to fulfil their wishes. What are the safeguards for that?
Sovereignty of policy is at a huge risk when you have any export earnings and you have to look for loans since you are not generating enough money. The terms will be much more difficult, and the pressure will be significant. You have to look for aid. When we talk about creating this capacity, we mean that we are improving and widening the space we have in terms of sovereignty. A country that imports shoes and clothes is much weaker than a country that produces them on its own.
In order to avoid these risks, what you need to do is to diversify the sectors and the economy. If, for instance, you only focus on coffee exports, when prices collapse, which happens many times, the whole economy is affected. We are diversifying; we have now identified 10 key industries where we will be focusing.
Finally, the whole issue depends on how you manage FDI. If you give free ride to FDI, then you have no control. I can give you a few examples here. Some of these companies, for instance, wanted to have dormitories inside the factories. We said we won’t allow that because we do not want to see the workers like slaves staying inside factories for 24-hours. We told them we have a place outside the park where residences can be built. We encouraged them to build these residences and even offered to give the land free of charge.
At the Hawassa Park, some of these factories have tried to come up with inadequately controlled waste treatment facilities. We said we won’t allow that either; there should be zero liquid discharges. We said we have to do our best and bring in the latest technology for waste treatment. This is also important for them because if the industrial parks pollute, then the buyers will be disappointed, for consumers will apply pressure.
We also know that there are dynamic young [Ethiopian] people who are willing and making effort to build factories. But they have problems of access to finance, market, and technology. Foreign firms will occupy 80pc of the space, while locals will use 20pc of the sheds. When we talk about locals, for instance, some of the large ones could be renting 60,000sqm of factory buildings, while the small ones can go for 3,000sqm.
We will provide them training and link them with the leading companies to work as subcontractors. By being there, we will also address the demand for finance because they do not need money to build the factory, lease lands or wait for years to get the land. It is already ready, fully equipped with infrastructure. They will only need loans for working capital, and to buy equipment, which is perhaps 50pc of the overall investment.
We will even give them guarantees for loans from the banks. Then we will wait and see how they perform, particularly in the export sector, before we ask them to expand. We will give them additional facilities, and incentives. Those who do not achieve, are failures and will be asked to leave the parks, find other businesses. During the first year, there could be 20pc from domestic industrialists, but year two will have 25pc, and the third year the share will increase to 30pc. It will gradually increase and the dynamism will be quite fast as the learning will be seamless.
Q: I can see that you are very passionate about these projects.
I am simply explaining the key concepts behind this. It has nothing to do with passion. I am just arguing and providing evidence that is historically supported elsewhere – concrete evidence, rather than sentiment.
Q: In the debate within the ruling party, there appears to be remaining issues that have not arrived at consensus. And when you look at the document of the GTP-II, it seems to be a product of compromise between the different forces who prescribe to different models. In the absence of a full consensus, are you being tactical in your approach doing what you believe is the best thing to do?
The GTP document is clear and consistent. There is no illusion there. You should not formulate your opinion with some idea that may have been reflected by some individuals that you may know.
If you look at the party, and the plan, from the perspective of industrial policy, it has clearly articulated that we want Ethiopia to be a manufacturing hub. We have concretised how many jobs we need to create, what the share of GDP in export goods should be. I have mentioned the strategies targeting manufacturing investment as I have explained about the industrial parks, which is the second case strategy. And of course, the third one is making sure that the infrastructure is aligned to support this industrialisation. Industrial policy requires that key sectors be defined, which we have done. There is nothing in vague.
If there are few individuals who entertain that, they are probably living in the Stone Age. Because they are not looking at the global situation; they do not see how this country should move to realise structural transformation and achieve sustained growth. Ethiopia cannot become a middle-income country by focusing only on one sector. It needs manufacturing capacity. And, when developing GTP-II, we looked at successful countries where manufacturing is strong and not just any middle income countries. Nigeria is a middle income country, for instance. But we looked at countries which are strong in manufacturing in order to emulate them as models. We focused on China, Vietnam, Turkey, and South Korea during the 70s, as well as Brazil. All these countries had 18pc to 21pc share of manufacturing to their GDPs when they were at lower middle income level.
Rather than focusing on what few individuals would say – because after all history will leave them [behind] – we have to look into countries which we can emulate and learn from. We do not have any sort of ideology. We have to look at the reality, at the local conditions; we have to look at the international conditions, which have an impact on us. We have to focus on this rather than trying to compare with some ideas that need to be dropped that are not based on economic history. They are not even based on the dream of making this country a success and economically strong.
Q: You have chosen to pick up companies to do turnkey projects, without the competitive bidding process of the government. I understand it is because you want deliverables within a short period. But the outcome of that is you are being criticised for picking the winners and losers in a very arbitrary and subjective manner.
The allegation is unfounded. We are following the government’s procurement procedure, which allows three mechanisms: open bid, which may be international bidding; short-listing, an important element of the proclamation; and contract awarding. Of course, there are conditions to fulfil when you make any of these decisions.
Up until now, the tender process we have gone through and awarded the contract to is for Hawassa. And it is going excellently. It is too rosy; things are going in the best way we can imagine. We wanted to build these parks in six months time. If we were to have first the design, and the contractor, the bidding process alone would have taken six months. By combining design and contract, we avoided the conflict between a consultant and a contractor. We decided not to use a contractor just because of the number of machinery and engineers the company may have. We wanted to work with companies who have the capacity to build and have an already proved record in building successful industrial parks.
We included a condition that the company which is taking this project should be able to operate with its own financing, because we know that the finance will not be released as the source is a foreign bank. We also included a condition that we do not want the company to come back to us claiming it could not source foreign currency to open letters of credit. The company should import machinery it requires using its own foreign currency funds.
Fortunately enough, it is one of the leading companies, the Chinese Civil Engineering Construction Corporation (CCECC), which is building Hawassa, a project we do not want to see fail or take years to get completed. One of the things that worries me a lot is how the growth rate of this country is affected due to shortage of foreign exchange earnings. If a country cannot import machinery, capital goods for factories, inputs for agriculture, it cannot grow. We will create 50,000 jobs at Hawassa, and will generate one billion dollars in a year or a year and half. This will be a miracle.
Q: Do you see any domestic construction firm capable in meeting these standards that you just laid out?
One of the main failures in Bole-Lemi was that it was given to 23 contractors. It is not finished yet. This is the primary concern. Perhaps after two years, some local companies will try to closely work with these leading companies and learn how to build parks. Once we build phase one, for instance, local contractors will open their eyes because the engineers, technicians and contractors, who would be working in the industrial parks, will be looking for subcontract activities from them. They will try to learn. We will have a model to copy. In the absence of this, capacity building will not happen. Gradually, probably by the end of GTP-II, we will have local companies which will be capable of building these parks.
Q: Do you see any potential for local companies to get involved in the construction of the industrial park in Dire Dawa?
To be honest, no! We do not want to repeat Bole-Lemi I. We have allocated a new budget of 500 million Birr, for the remaining activities.
Q: You have done your doctoral study in industrial economics from the University of London’s School of Oriental & African Studies (SOAS). To what extent have your views over the years shifted from your traditional leftist leaning worldview into what is now liberal macroeconomic policy making?
The good thing at SOAS is that it entertains all views: Leftist, rightist, liberal – all types of views. I had a choice between six or seven universities, and I chose SOAS for two reasons: It specialises in Africa and Asia; and the environment allows all types of views to be entertained. Marxist political economy is taught there, as is Amharic.
The subject I chose was about structural transformation, industrialisation, and catching up. I did my best not because I just attended courses. You dig out and read books. And I tried to work on it. But, as you can imagine, the content of the book – Made in Africa: Industrial Policy in Ethiopia – does not express liberal views. It criticizes these views and talks about industrial policy. With the economic liberalisation view, industrial policy is unacceptable because it is about protection, and the role of the state. I believe this work has been important to many African countries.
Some of the presidents and ministers have received copies, and I have had engagements with them in some workshops. Many of them say that they should learn from Ethiopia, for its development path is, in many ways, different. Ethiopia is able to achieve this because it chose its own development path. We have not always been good students of the IMF and other financial institutions. We have always been choosing our way because policy independence is important to us. That is the lesson they need to take and this not what is taught in liberalisation or the Washington consensus. It is in fact, the reverse.
Q: But I am sure you are aware that you are being criticised for an attempt to impose liberal policy making on Ethiopia. How much merit does this have?
These are few individuals, whose political commitment to push this country forward is questionable. My views are supported by economic history and empirically. It is very clear and consistent throughout the book. That is why it has been acclaimed.
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